How self-driving cars will change the property market

18 September 2017

Google is already testing out self-driving cars in California, and Uber is doing the same in Pittsburgh. Car manufacturers (e.g., Ford, Toyota and Volkswagen) are promising to introduce self-driving cars to the market by 2020.

So when will these cars become the absolute and only means of transport? By 2023, according to Morgan Stanley; by 2025, according to John Zimmer (the founder of Lyft); or 2040, according to conservatives like McKinsey. However, Menlo Ventures’ managing director Venky Ganesan believes that the real estate market will start to adapt to the impact of self-driving cars within just 8–9 years.

New-build residential property will become cheaper

KPMG experts have calculated that the cost of owning a $21,000 car (completing an average mileage of slightly over 15,000) will increase to $40,000 within five years. Such a price seems high when taking into account that the average car sits unused for around 22 hours of each day.

The arrival of self-driving cars will push people towards renting vehicles over the short term rather than owning vehicles outright; the latter being cheaper, more convenient and more efficient. As a result, there will be less of a need for private garages.

On the one hand, this will lead to a 15–20% increase in living space: according to CNBC, the average American home is 280m², while the size of the average garage is around 45m².

Whilst, on the other hand, homes without garages will be cheaper to construct. According to CBRE, parking spaces in Washington, DC increase the cost of residential properties by an average of 25%. As such, without the need for parking spaces, we will see a decrease in the purchase and rental prices for real estate.

Detached houses on the outskirts of town with insufficient infrastructure will become less liquid

By autonomous vehicles we mean self-driving mobile homes in which residents will be able to take a shower, read or busy themselves with something else on their way to work.

Studies show that the demand for self-driving cars will be higher in remote areas than in city centres, where those with a short walk or bicycle ride to their destination will be comfortable without a vehicle. We can say that driverless vehicles should well decrease the liquidity of real estate in remote areas where mobile homes will be able to substitute conventional residential homes, being able to be parked closer to workplaces and allowing drivers to utilise their time more efficiently.

Flats in central locations will remain popular, as they are situated within walking distance of offices, shopping centres and restaurants. The same will be said for properties located on the outskirts of town that have well-developed infrastructure and good transport links.

Demand for short-term rentals and hotels will decrease

According to a study by Michael Sivak and Brandon Schoettle from the University of Michigan, young people will travel more often. This is firstly because people without driving licenses, the number of which has been growing significantly over the last 30 years, will be able to own and use their own vehicle and, secondly, because travelling will become cheaper thanks to the opportunity to work whilst on the move.

Sven Schuwirth, a senior strategist at Audi, predicted that self-driving cars would cause a major disruption to the hotel industry by 2035: tourists are set to sleep in their vehicles on the road instead of staying in hotels.

Andrew M. Ryan, author and blogger, calculated that a tourist would have to rent around 30 hotel rooms and pay around 60 restaurant bills to visit 48 American states. Ryan’s calculations show that the usual American road trip in a car costs around $6,212, whereas a trip in a self-driving mobile home would cost $2,312 (i.e., 2.5 times cheaper).

Self-driving mobile homes could well become a beneficial alternative to hotels and short term flat rentals. However, this is not a option for those wishing to travel to other continents, and, as such, hotels and renting apartments over a few days will nevertheless remain popular in major tourist centres, such as London, New York or Paris.

Demand for retail property will fall; demand for warehouses will rise

Transportation, management, salesperson salaries and retail property rental costs make up 20–30% of the value of any product that’s for sale. Therefore, goods in online stores are often cheaper than in shopping centres. When self-driving vans and drones start to transport goods autonomously (and this doesn’t seem to be so far from now), delivery times will reduce. Unmanned vehicles will change the rules of the game in the market.

This will present a serious challenge to retail property within 10–15 years. Supermarkets and high street retail are already being replaced by online stores, whilst the number of warehouses and distribution centres are, conversely, on the increase.

Warehouses will be built even further from the centre

In the US, just as in other Western countries, drivers are prohibited from driving their vehicles for more then 11 hours in a row, which limits drivers to covering 600–800km per day, depending on the roads. This is the reason why warehouses are located relatively close to residential districts.

Driverless trucks will be able to ride day and night. This will not only allow businesses to deliver more products, but also allow them to reduce expenses: retailers and producers will be able to choose facilities on the far outskirts of city centres with cheaper rental prices.

Parking spaces in business districts will be relocated to the periphery

According to Old Urbanist, 65% of Houston’s downtown area is occupied by roads and auto-mobile infrastructure, whilst National Real Estate Advisors state that 30% of space inside the buildings in Washington, D.C. is used for car parking purposes.

With the arrival of driverless cars, there will be no need to park nearby one's office. A study by Jason Henderson and Jason Spencer from Cornell University has shown that parking spaces in American cities could well shrink by up to 42% or just under 5,700 km². After a reduction in the number of parking area needed, coupled with the constriction of space required to accommodate cars on the roads (mentioned not only by Henderson and Spencer but also by Andrew Mondschein from the University of Virginia), building density in cities may be set to increase.

Existing multi-storey car parks will be converted to office or retail facilities. Andy Cohen, Co-CEO of Gensler, told CNBC that the company has already started constructing parking structures with horizontal floors instead of the slanted ones, all so that the buildings can be easily converted to office spaces if needed.

As a result, the most liquid of properties will be those where there are car parks that are located on the outskirts of town or near major transport junctions.

New technologies should be set to make many property types assailable. We recommend investing in peripheral warehouses and residential real estate in central districts: such properties will secure real benefits over parking and street retail in as little as 10–20 years.